Comments on the CFPB’s Proposed Payday Lending Regulations
BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1041
[Docket No. CFPB-2016-0025]
Payday, Vehicle Title, and Certain High-Cost Installment Loans
Community Development Finance
3411 East 12th Street, #124
Oakland, CA 94601
October 6, 2016
Community Development Finance (CDF) operates a nonprofit check cashing store which opened in May 2009 in the Fruitvale neighborhood in Oakland, California; it is the only nonprofit check cashing store in the country that we are aware of. We offer typical financial services, but we charge much lower fees and prices; we also offer other services, including financial coaching, small business services, referrals to banks and credit unions, and policy development. We estimate that our lower costs and financial coaching annually now save people at least $200,000 to $250,000, and perhaps more, and cumulative savings of about $1.25 million since opening.
CDF also operates two lending programs for the underbanked, targeting low and very income people with credit scores between 400 and 600 – people who are the least likely to receive lending support from mainstream sources. We use the payday loan structure for smaller loan amounts, but we charge much less – a maximum of half the market rate – and an even lower rate for many others. We use the payday loan structure for our Debt Removal Loan, which offers a 12% APR for borrowers who are in our financial coaching program. We also try to talk people out of this type of borrowing and use our financial coaching processes to highlight other options, including taking smaller loans, less frequent loans and stopping altogether. We use our consumer loans to refinance many payday loans at much lower costs. Overall, we have had a lot of success with these methods since we started lending in 2010. In total, we have made 4,800 loans for roughly $1,250,000 through September 2016. We underwrite the loans and our loss rate is under 0.75%, although the delinquency rate is much higher.
We also offer larger, longer-term, lower-interest rate loans through our consumer installment loans. We started the program in 2012, making only 6 loans; the program was problematic and we suspended the program in early 2013. In 2014, we started lending again in partnership with a tech startup, SimpleFi. The program required the borrower to receive financial coaching by our staff to qualify for loan consideration. We developed the necessary methodologies, documentation, procedures and understanding of borrowers’ needs through this process. The tech startup suspended the program in mid-2015 while they focused on their own core lending program. We made 76 loans under this partnership totaling $241,896. After the partnership was suspended, we raised some capital and started lending on our own, with some variations. We have made 62 consumer loans for over $170,000 with only one small write-off to date and our underwriting is working extremely well so far. We require financial coaching for all borrowers in this program, and it is making a deep impact on many people’s lives. Combined, all CDF’s consumer lending efforts have resulted in 144 loans totaling $415,000.
With this background, CDF would like to offer comments on the Consumer Financial Protection Bureau’s proposed Payday Lending regulations.
We agree that the existing payday lending structure can be predatory and people can be trapped in a debt cycle (and we have borrowers who also get trapped in our loans as well even though we work very hard to get them out of the cycle). We agree that the lending program should be modified to be more effective and equitable.
But we disagree with the CFPB in its specific proposals, which we believe would make it very difficult for most lenders to continue making these loans. Furthermore, we also believe several additional key issues can be acknowledged:
- Low- and very-low income people with bad credit (credit scores of roughly 400 to 600) desperately need access to fair sources of credit and that need must be addressed.
- The focus on pay day loans tends to miss the even greater need within this population for much higher amounts of borrowing; they most often are deeply in debt, often under very onerous terms. While pay day loans represent a dangerous loan structure that indeed does trap many people, the total amount of debt is usually relatively low compared to other debt; people with payday debt often have other, much higher debts, and these debts also often have very predatory rates and terms. These loans include personal installment loans, credit card, medical, student, and auto debt in addition to large amounts of debt in collections and sometimes loans from illegal lenders. If someone owes $5,000 to $15,000 or more to these sources at high rates, some predatory, plus has other debt in collection, then paying out $300 or $400 more per year for pay day loan fees certainly may be worrisome on some level, but not as problematic. (Please see “Payday Loans, Debt and the Underbanked” by Daniel Leibsohn for our analysis of this issue.)
- The present political and policy agenda nevertheless focuses on pay day loans; they are a relatively easy target. But constructive policies and programs also need to be developed to address the combination of these other debts as well. Many different types of debt will require many different types of efforts and strategies to address them. Therefore, it is much more difficult to find solutions for these issues. But that is exactly what is needed: a national effort to address the full range of debt needs of low income households rather than this enormous effort directed primarily at payday loans.
- The solutions offered for these debt issues typically recommend that banks and credit unions provide this type of financing to replace payday lenders. For many reasons – economic, regulatory and business/operational issues, this approach is very unlikely to occur beyond modest demonstration programs, at least under the present set of incentives and barriers. Very large scale, sustainable lending programs that are needed to address these issues are unlikely to be provided by regulated institutional lenders for this large group of people.
- Likewise, the newer recommendation for a solution – the United States Postal Service – also is unlikely to provide a viable alternative, certainly in the near term, for a variety of reasons. (Please see The Post Office and Financial Services for the Unbanked” by Daniel Leibsohn.)
Most importantly, we believe that any proposal that includes eliminating or greatly diminishing existing credit sources, such as the CFPB’s proposed regulations for payday loans, also must include viable replacement alternatives. Otherwise, low and very low income people, in general, may be much worse off than they are now, although many individuals would definitely benefit.
Any viable alternative program minimally should meet the following criteria:
- It should offer fair prices and products to low and very low income people.
- It should be able to operate on a very large scale.
- It should be sustainable, that is it must operate at least on a break-even basis based on the revenue it generates. The need is enormous and there is not enough subsidy available to support this lending at the necessary scale, although subsidy will be needed to help organizations reach scale.
CDF has developed a plan to expand its existing lending experience to a very large scale under these criteria. CDF has designed a two-tier lending program that, with the appropriate support, can reach a large scale, be operationally self-sufficient once it reaches scale, and offer fair products to replace predatory payday, car title and installment loans, which form the core of existing lending available today. The programs would use
1) A pay day loan structure for the lower loan amounts up to roughly $300, or slightly higher depending on state law, but at a dramatically reduced rate (probably between 25% and 30% of the market rate) and with no required financial coaching, combined with
2) A consumer installment loan program for higher loan amounts at very reasonable rates (probably between 20% and 30% of the predatory rates) with required financial coaching.
This program, which we have implemented manually on a small scale can be scaled up very significantly, utilize automated systems for large parts of the work, operate on a sustainable basis and offer excellent, fair products to borrowers.
Some other private sector efforts are underway and there may be many other possibilities that could be created as well. Before dismantling the existing credit framework, CFPB and other agencies and organizations should help create viable alternatives.
Community Development Finance
3411 East 12th Street, #124
Oakland, CA 94601
Daniel M. Leibsohn